Below is an explanation provided to a government researcher who asked how leftover money (not used for medical claims) is used in self-funded plans with a TPA versus an insurance company. Also, what is the role of state premium taxes on self-funded versus fully-insured plans.
(The answer was written by SPBA Active Past President Fred Hunt in July 2011).
There are several of different answers. First of all, for state premium taxes and laws, the question is based not on whether it is self-funding, but under what law does the plan operate.
For ERISA plans (which includes virtually all self-funded corporate & collective-bargained plans), the preemption section of ERISA exempts ERISA plans from all state insurance laws...including premium taxes and state-mandated benefits. However, of course, the Stop-Loss (reinsurance) insurers from whom most self-funded plans buy do pay premium tax.
Self-funding has blossomed in recent decades, so there is a large & growing segment of plans for state & local government employment entities (such as school districts or city/county employees). Originally, in 1974, ERISA had a twin bill called PERISA (Public Employee...). To be candid, governments did not want to adhere to the extremely strict fiduciary duties in ERISA, so PERISA was killed and never passed. So, these "public" (a.k.a. "government" plans) are in sort of a vacuum. They can be regulated, as much or as little as each state wants. Since it tends to be seen as "in the family" within a state, regulation (and presumably premium taxes) are much more lenient or non-existent. I don't know of any reliable statistics (because such state/local government entity plans are not normally on the radar of surveyors) of how big this sector is. My only hint is that of SPBA's 273 member Comprehensive Service TPAs, 150 report that they do Public plans among their clients.
There are also "Church" (a.k.a. "Religious") plans (Diocese or religious entity employers or religious orders) that have adopted self-funding. They are pretty much unregulated because of the Constitutional separation of church & state. These are not normally huge plans. Of our 273 Comprehensive Service TPAs, 107 say they do Church plans.
CAVEAT: Several years ago, NY state applied a surcharge on claims paid. Everyone assumed that it would be preempted by ERISA, but the US Supreme Court shocked everyone and said that it was OK to charge ERISA plans.
BROAD ANSWER: The answer to your basic question is that money that would be spent on premium taxes in an insured plan is used for paying claims in a self-funded plan. It is simply logic. Self-funded & insured plans both have administration costs. Those admin fees are competitive and openly-negotiated TPA fees in the case of self-funding. In insurance company plans, admin costs are buried within the premium paid. Insurers generally include more things in their administrative category...which is the crux of the MLR issue in the health reform. So, self-funded plans are simply minus the extra cost of state premium tax (except what might be attributed for Stop-Loss), so money remains as plan assets. Since ERISA is extremely tough that plan assets be used frugally,....and the TPA market is very competitive, you can be sure that if there is ever anything that can be described as "extra" money in a self-funded plan, it is used for plan purposes.
